Good day, ladies and gentlemen, and welcome to the QuinStreet Second Quarter Fiscal 2022 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Hayden Blair. Please go ahead.

Thank you, Laura. And thank you to everyone joining us as we report QuinStreet second quarter of fiscal year 2022 financial results. Joining me on the call today are Chief Executive Officer, Doug Valenti; and Chief Financial Officer, Greg Wong. Before we begin, I would like to remind you that the following discussion will contain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements, and are not guarantees of future performance. Factors that may cause results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made today and our most recent 10-Q filing. Forward-looking statements are based on assumptions as of today and the company undertakes no obligation to update these statements. Today we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures are included in today's earnings press release, which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead.

Thank you, Hayden. In the December quarter, our fiscal Q2 was a more difficult quarter than expected in the insurance client vertical as auto and home insurance carriers reduced spending aggressively through the end of the calendar year to offset high 2021 claim costs. Insurance client spending bounced back strongly in January, up almost 80% over December with the reset of the calendar year, and as we had expected and had been communicated by carriers. Combined with the strength we're seeing in the rest of the client verticals and business, we were on a run rate in January to more than meet or beat the full fiscal year forecast we provided last quarter. But auto and home insurance carrier clients have once again significantly cut budgets and pricing in February. We have just been digesting the adjustments this past weekend and through today. The immediate impact of the insurance client cuts is a reduction in our outlook for this quarter and the rest of the fiscal year to reflect lowered spending. That is reflected in the outlook numbers we put out today, with which we are obviously disappointed. That said, due to the diversity of our business and the resiliency of our team and model, we still expect to grow revenue and generate between $40 million and $45 million of adjusted EBITDA this fiscal year. We will also remain nicely cash flow positive with a strong balance sheet, even as we weather this continuing, but still likely relatively short-term storm in insurance. Our medium- to long-term outlook remains exceptionally positive. So, what is happening in auto and home insurance? Why are carriers cutting spending and pricing? While we are not privy to all of our clients' workings, nor would it be appropriate for us to share any non-public details if we have them, some trends seem clear and are publicly known. The claim cost environment is difficult and dynamic. Rates that worked for the past couple of years are no longer effective, and factors are changing rapidly. There is an increased frequency of claims as more folks go back to work and become more active generally. Costs to repair were higher due to supply chain issues, demand outstripping supply, inflation generally, and inflation specifically in the new and used automobile replacement market. Carriers have begun to raise rates to reflect these increased costs, but we appear to be closer to the beginning than the end of that cycle. In some cases, rate increases have not been enough to offset rising costs. Carriers are pausing writing business in entire states, cutting marketing spending while they analyze these factors and work to find new higher rates to reflect the changing economics. In addition, consumers are beginning to switch or buy new policies as they encounter the initial wave of higher rates, making marketing spending less effective and efficient. Net, we are in a period of a lot of uncertainty, change, and importantly, transition in the auto and home insurance market. And it is being reflected in pauses, reductions, and volatility generally in marketing spending. How long is this transition period in auto and home insurance likely to last? We have served the auto insurance market for almost 15 years, and well over 20 years if you count the predecessor company we acquired to enter the client vertical. We have seen some of these adjustment cycles. The last one was in or around 2016 when higher incident frequency due to distracted driving from smartphone usage, combined with higher cost to repair bumper sensor technologies, significantly changed underwriting economics. That cycle affected us for about six months. Then like now, no one is closer to or in closer communication with auto insurance carrier marketing clients than we are. Based on our actual past experience with similar cycles and discussions with carriers, these cycles typically most negatively affect marketing budgets for around six months. Based on that, we hope to be back to a more normalized market and positive momentum in the auto insurance client vertical somewhere between late spring and early fall. Why six months? Two reasons. First, that is typically long enough for most carriers to analyze, adjust, and file new rate models. Second, that is the length of a typical consumer policy period. New rates will typically kick in no more than seven months after the cycle starts. What happens next? The further we get into the transition period, the more consumers reach their renewal period and the more they get hit with increased rates from their current carrier. That usually drives a gradual and then accelerating increase in the number of consumers that shop with other carriers and begins a positive super cycle in our business. We clearly saw that and experienced it after the 2016 transition period. Why is our medium- to long-term outlook still exceptionally positive? Now, I just noted one key reason. This difficult transition period is likely to lead to increased consumer shopping activity in auto insurance in the coming months and quarters. That should be a strong tailwind for our insurance business. Like we have seen before, and especially when combined with the gains we have made and expect to continue to make in market share, quality results for clients, technology, and media. The second reason our medium- to long-term outlook remains exceptionally positive is the strong momentum that continues in our non-insurance client verticals. Credit-driven client verticals continue to recover nicely, with client budgets and consumer activity growing at high rates. Progress in Home Services, perhaps our biggest long-term market opportunity, continues to be strong and steady. Overall, non-insurance client vertical revenue grew 36% year-over-year in the December quarter. Those strong trends combined with the eventual resurgence in insurance bode well for coming quarters and years. The third reason our medium- to long-term outlook remains exceptionally positive is the progress we are making with big new growth initiatives, especially right now with QRP. QRP revenue is accelerating. Despite the current challenges in auto insurance that do affect the activity of our agency clients, multiple clients have moved into the ramp phase of their implementations of the platform. The pipeline also continues to grow and progress well, broadening our footprint for future growth and scale. We now expect QRP revenue to exceed $1 million per month by June based on actual projections from ramping agency clients. Looking beyond this auto insurance transition period, we have never had a better combination of market opportunities, competitive advantages, and exciting growth initiatives in the history of QuinStreet. I hate what is happening in auto insurance right now because of its near-term impact on our results. However, I could not be more pleased with our position overall and our outlook for the future. I cannot be more proud of our team, which is easily the best in company history, and how they have navigated and executed to continue to deliver results and progress for long-term value creation in such a complicated environment. With that, I will turn the call over to Greg.

Thank you, Doug. Hello, and thanks to everyone for joining us today. Revenue in the December quarter declined 7% year-over-year to $125.3 million. GAAP net loss was $5.6 million or $0.10 per share. Adjusted net income was $3.2 million or $0.06 per share. Adjusted EBITDA was $5.6 million. Looking at revenue by client vertical, our Financial Services client vertical represented 72% of Q2 revenue and declined 13% year-over-year to $90.2 million. Doug well covered the details of what is going on in the insurance client vertical in his remarks. All other financial services businesses grew at double-digit rates or more in the quarter. Within our credit-driven client verticals, progress and revenue growth continue well ahead of our initial outlook for the year. We continue to expect revenue in those businesses to return to pre-pandemic levels by June. Our Home Services client vertical represented 27% of Q2 revenue and grew 16% year-over-year to $33.8 million. Some services remain in the very early innings and are perhaps our largest addressable market. Our strategy is simple: one, expand our core trades where we have well-established client and media relationships; two, scale our growth rates which are earlier in their development; and three, add new trades into the portfolio of offerings. We expect this multi-pronged growth strategy to drive double-digit organic growth for as far as the eye can see. Other revenue, which consists primarily of Performance Marketing agency and technology services, was the remaining $1.4 million of Q2 revenue. Turning to the balance sheet, we grew our cash balance by $6 million and closed the quarter with $115 million of cash and equivalents. In summary, while insurance spending remains volatile, momentum in non-insurance verticals remains strong. Our confidence in our team, our competitive positioning, and our growth initiatives, including QRP, remains at a long-time high. With that, I'll turn the call over to the operator for Q&A.

Thank you. We will now take our first question from Jason Kreyer of Craig-Hallum. Your line is open, please go ahead.

Hey guys, good afternoon. Doug, I just wanted to step back and understand the cadence a little bit better. It sounds like maybe there is a little bit of choppiness in the December quarter. I'm not sure if that was isolated to December or not? You saw the January rebound that we talked about last quarter that you had anticipated, but then it was kind of the move in recent weeks. And so, one, I want to make sure that cadence is correct? And then two, curious if there was a little bit of volatility in December. I mean what are you hearing from the carriers that lead you down the path of this three to six months kind of hesitation as opposed to just a shorter-term period of volatility?

Thank you, Jason. You generally captured the timing correctly. We began observing budget impacts late last year, particularly in September, after Ida, which affected our loss ratios for the calendar year. We discussed this in relation to 2021. The carriers have communicated that they are strengthening their positions in January as they reset their loss ratios for the new year. We are making significant progress; we have established budgets and are preparing our systems for the carriers entering January. When January arrived, we started strong, with carriers spending significantly, and prices and volumes increased, with January seeing nearly an 80% rise compared to December, slightly exceeding our forecasts for the second half of the fiscal year. However, just last week, we received new pricing from carriers for February, which reverted to December levels, and we learned that several states were closed off by a number of carriers due to excessive loss ratios. The carriers are facing a rapidly changing loss ratio environment that does not align with their current pricing. They’re reassessing their rate models state by state, with some states already seeing rate increases while others are on hold during this re-evaluation. Generally, the carriers expected to operate at capacity now, but as we attempted to push forward, we realized that the loss ratio challenges associated with the transition out of COVID, along with inflation and other factors, are more severe than we anticipated, affecting our economics significantly. Consequently, we will reduce or pause spending and re-evaluate our underwriting and pricing strategies. This situation is publicly acknowledged, as major carriers have announced rate increases and intend to do so again. Typically, it takes some time for them to adjust to new variables, refine their pricing models, and reopen states. Historically, this adjustment period has lasted about six months, and they expect this time frame to hold true as well. When we analyze the entire cycle, we anticipate a return to a more favorable insurance market and spending dynamics, aligning with historical trends during the late spring to early fall period when re-rating occurs. We saw a similar pattern in 2016. In 2018, there was a robust recovery following a downturn, and our auto insurance business more than doubled within about a year and a half. While we are not pleased with the current situation, it is a normal occurrence in the insurance industry, and various environmental changes can create conditions that simple underwriting adjustments and price changes cannot address. This phase is particularly complex due to the lingering effects of COVID on supply chains, inflation, and auto pricing, but it remains difficult for us. On a positive note, we are optimistic about the future and are well-prepared to navigate this period while still achieving revenue growth for the year, maintaining a healthy cash flow, and generating profits.

I appreciate all the context. And I want to ask the question just on concentration. Now it certainly sounds like you're hearing that across the board from pretty much all carriers. But I was under the assumption that as we got to kind of late summer, early fall a year ago, some carriers had already started to make adjustments to rate cards based on some of these trends already emerging. So maybe you can just humor me and kind of talk about concentration if you're seeing big changes across carriers? Or is everybody really taking the same drastic cuts?

I can't say for certain about everyone, but this is not limited to just one small group of carriers. It's a widespread issue. Different carriers are at various stages of their processes to re-underwrite, re-rate, file, and reopen. So, while it's quite complex, it's leaning more toward affecting a broad range of carriers rather than just one.

Okay. And then just the last from me. Can you talk maybe about what you think you guys can do over this period of the next three to six months to better position QuinStreet for more market share gains on the other side of this?

I believe the efforts we’ve been making have focused on building stronger relationships with major carriers and media partners to improve our understanding of market segmentation and the value associated with each segment. This understanding is increasingly important as the market evolves. By enabling clients to refine their segmentation and targeting, as well as their pricing strategies, which is exactly what QNP facilitates, we position ourselves for success. We are committed to enhancing our relationships with carriers during this transition period, helping them to interpret underwriting rates and evolving segment values. We're now more closely aligned with key clients than ever before, and we’ve developed strong partnerships with agent-driven models that have yielded significant growth based on performance. This is a core strength of ours, and we intend to continue this focus, which I believe will be beneficial in the current landscape. Additionally, we will continue investing in QRP to ensure its successful rollout, as it will support agencies that are facing challenges due to state shutdowns. We recognize the need to assist them in becoming more productive. Alongside this, we’re driving growth in other areas. We've seen substantial growth in our credit-driven businesses and solid double-digit growth in Home Services. We are exploring all avenues and hope that these efforts will position us favorably moving forward. In the meantime, we will concentrate on growing what we can control.

I appreciate all the transparency from you. Thank you.

Thank you, Jason.

Thank you. We will now take our next question from John of Stephens. Your line is open, please go ahead.

Hey guys, good afternoon.

Hey, John.

Hey, from a big picture standpoint, I mean, you guys clearly bode up around the long-term outlook on the business. It sounds like the insurance side of things is going to be more of a transitory event. I think your guidance, obviously, implies that kind of recovery just exiting the fiscal year. I think you're going to be faced obviously with the dynamic of whether investors believe in it or not. You guys have a really strong balance sheet. I think $115 million of cash. I'm just curious about what you guys are thinking about as far as buybacks and how that might change if there is any kind of noise or dislocation in the stock as you kind of navigate through the turbulence on the insurance side?

That's a great question. We've discussed this at the board level and will continue to do so. We are monitoring the situation closely and observing how investors react in relation to our business performance. If we notice a significant gap between the two, we're open to considering options for that cash regarding capital allocation and buybacks, similar to what we've done in the past. We had this conversation at the board level recently, and it's definitely on our minds. We've executed buybacks historically, including a $50 million buyback. So, we are indeed more open to that possibility now compared to before.

Yeah, makes sense. On the non-insurance revenue growth, I mean that was very strong. I think 36%, which you guys said. If you back out the Home Services business, I think that obviously implies fairly sharp growth at the credit-driven product. So I don't know if you can maybe talk or provide a bit of color around the sources of that strength? And maybe more specifically, if you can kind of outline the personal loans and credit card run rates and how that's looking kind of pre-pandemic levels?

We expect those two businesses combined to perform well above pre-pandemic levels this quarter and even more so in the next quarter. Both are doing exceptionally well. One is experiencing around 70 percent year-over-year growth at a decent scale, while the other is outperforming with triple-digit growth at a good scale. Together, these businesses have significant value for us, amounting to tens of millions of dollars, and they are close to reaching a combined total of $100 million. Is that correct?

Yeah, I agree with that.

And we may exit the year with those two running at $100 million, is that right?

Yes. Yes, that's right.

So that gives you a sense of their scale, John. These are pretty big businesses, growing at really high rates, and we're seeing all the vectors in those businesses working. We are gaining share in media, we're seeing more traffic from media, we are getting more clients than we've ever had. We have closer relationships with those clients and are getting more budget and better pricing from them than we ever had. So those businesses are firing on all the right cylinders. It's dominantly associated with coming out of COVID, and the banks themselves, broadly defined lenders, issuers, et cetera, having really strong balance sheets after the last few years of conservatism and low interest rates. Those two things combined are creating a great environment for strong growth and catch-up really because we are still catching up, and we expect growth beyond the catch-up, so we should catch up to pre-pandemic. As I said probably this quarter, if not this quarter for sure next quarter. I see a lot of momentum to continue very good trends in those businesses over the next few years.

Okay, that's very helpful. Thanks guys.

Thank you, John.

Thank you. We will now take our next question from Jim of Barrington. Your line is open, please go ahead.

Thanks. I was first wondering whether the recent trend given the chip shortage to fewer new cars and more used cars has had any perceptible impact on the level of repair costs?

We have been informed that the rise in used car prices is significantly impacting claim costs, particularly for policies that include replacement cost coverage, which is now common. Consequently, the replacement cost of both used and new cars is being substantially influenced by the current state of the auto market.

Okay. And just as an observation, if there is a trend to repricing to higher levels on the part of all the carriers, it doesn't seem to create much of an incentive to switch. So why advertise? And it does seem like it's the same sort of reactionary impact you get from any other consumer product like during COVID, there were a lot of advertisers who cut back in general, because there wasn't much incentive to bite at their buying end. I'm wondering how you are looking at that and whether you think that just because something has happened in the past, like over this three to six month cycle, how do you have the confidence that this will be repeated given this sort of increased variability month to month you've sort of been pointing out? It seems like there is a bit of a quandary here, and it's not going in favor of planning to create an incentive to try to save money by changing to a different carrier?

Well, the carriers make money when people shop. The industry has consistently observed that during periods of rate increases, consumers are prompted to look for better deals because they realize their rates have gone up and wonder if they can find savings elsewhere. The actions of other carriers raising rates might not significantly affect this behavior. Generally, when consumers engage in efficient shopping due to the complexities of auto insurance pricing and the various economic factors affecting individual carriers, they tend to save between $400 million and $700 million each year. Even though rates are rising across the board, historical trends show that this situation encourages consumers to consider potential savings with other providers. Many of these consumers do save money by actively shopping for insurance. We anticipate this cycle will continue, and the industry believes the same, as major clients consistently affirm this pattern. In our experience, a similar situation occurred in 2016, which serves as a relevant comparison. Back then, we witnessed significant increases as many carriers raised their rates due to overall trends affecting everyone. Factors like increased distracted driving, repair costs from advanced technology, and a major storm in Texas all contributed to structural changes that led to widespread rate adjustments. As a result, our auto insurance business more than doubled within 18 months.

Well, that's a reasonable point. The $400 to $700 they might save might be not from what they're paying now, but what they might have to be paying relative to the new claims, and you can help them search through the complexity a little bit and come to some comparative conclusions. So as long as they're shopping, that's what your game is.

That's correct.

And then the other thing, you mentioned QRP getting up to about $1 million per month in revenue by June. I know that should be a fairly high-margin business, but how quick does it get to pretty good bottom-line results from that $1 million per month you think you can generate?

We're quickly reaching an 80% contribution margin on that, likely at the $1 million a month level.

Okay. All right, that's helpful too. Thank you very much.

Thank you, Jim.

Thank you. We will now take our next question from Max of Lake Street. Your line is open, please go ahead.

Hey, guys. I just want to turn back towards the balance sheet of $115 million in cash. Can you go a little deeper into future investments? I know we talked about buybacks, but inorganic opportunities may be outside of the insurance vertical. What do you guys see in that?

The recent acquisitions have been in areas outside the insurance sector to enhance verticals where we believe we can achieve significant growth. One example is our personal loans segment, which has become our third largest business and is experiencing rapid growth. Additionally, we are modernizing Home Services, creating a synergy that is expected to drive strong double-digit growth, potentially around 20 percent annually for the foreseeable future. Our top priority for cash and investment remains to seek similar opportunities. The industry is still quite fragmented, and we continue to be an effective aggregator and consolidator of these types of businesses. This focus on capital allocation will remain central to our strategy for a long time.

Okay, thank you. And then I want to shift to more of the model here. You kind of have a step down here in gross margin. I was wondering if that's what you kind of expect for a run rate throughout the rest of fiscal year 2022, around 8% I believe?

Greg, you want to take that.

Yeah, I'll take that one. The drop in gross margin is primarily due to the loss of operating leverage. So you have lower revenue levels dropping on top of the fixed cost base, which doesn't really change throughout the year. So gross margin will flex based on the amount of revenue driven every quarter. Also, remember, the December quarter is not only where we are dealing with challenges and volatility within insurance but also our seasonally lightest quarter is the December quarter. Thus, it's really just the lower top line on top of a very similar semi-fixed cost base.

Okay. Thank you, guys. That's it from me.

We will now take our next question from Chris Sakai of Singular. Your line is open, please go ahead.

Hi, I’m not sure if I joined the call late, but could you explain the reason for the increase in G&A? I believe it was around a $3 million increase.

Yeah. Hey, Chris, this is Greg. That's just a one-time charge that we took to revalue or adjust the fair value of an earn-out associated with an acquisition we did last year. That acquisition has been performing better than we expected, so we have to adjust the fair value of the earn-out, which was about $2.7 million. This is a good thing, which means the position is performing better than originally planned.

Okay, great. You mentioned that you expect more volatility in insurance over the next three to six months. Can you explain why that particular timeframe? What factors are influencing this timing?

The period we're anticipating is one that the carriers in the industry have experienced before. There's more involved than what we've encountered, and discussions with the carriers indicate that the typical duration for re-rating, relaunching, and implementing new rates, as well as recovering during times of misalignment between current rates, pricing, and claim costs, historically takes around six months to reach the lowest cost, potentially up to a year from start to finish. This phase seems to have started around last September. An analyst raised a question about the adjustments in rates, noting that others have started to see changes as well. In terms of our timeline, based on what carriers are communicating about their plans for re-rating and reopening states, we believe we are looking at late spring to early fall. There are two main factors influencing this six-month timeline. First, most large carriers can effectively analyze incoming data to revise their underwriting and rate models and implement new rates within six months, as longer durations would not be feasible for successful carriers. Second, many consumer insurance policies, such as auto insurance, typically have six-month terms. This means that depending on the timing within that term, consumers will face a rate increase once it expires. Following that increase, a significant percentage of consumers start shopping around to see if they can find better rates, which initiates the shopping cycle that is discussed throughout the industry and is something we have experienced ourselves.

Okay. All right, great. Thanks, Doug and Greg.

Thank you, Chris.

Thank you. A replay of today's call will be available for a week, starting at 5:00 PM Pacific Time today. The replay can be accessed by calling 719-457-0820 and entering passcode 4351235. This concludes today's call. You may now disconnect.